Japan: Japan has just lost second place in the world GDP league to China. But that is not so bad. China has ten times as many people, the average Japanese is ten times richer. Though Japan struggles to grow it remains wealthy, with unemployment about half the US and euro zone level. The lack of acute crisis helps explain why it can’t shake off the burst bubble of 20 years ago.
With growth of just 0.1 per cent in the second quarter, politicians in the governing coalition are demanding a hefty fiscal boost of 11 trillion yen ($129 billion), equivalent to some 2.5 per cent of GDP. Discussions between Prime Minister Naoto Kan and Masaaki Shirakawa, the governor of the Bank of Japan, have added to the speculation. But the budget deficit is already heading towards seven per cent of GDP this year.
And past colossal stimulus is evident in public debt that is now close to twice GDP. Exiguous yields on government bonds make the burden bearable, but they might rise one day, causing the deficit to spiral. Kan is likely to be cautious, though he may offer a 1.7 trillion yen mini-stimulus to placate his critics.
The strong yen, currently at 15-year highs against the US dollar, is another problem, particularly for exporters.
But the central bank seems unlikely to intervene unless the yen reaches 80 yen to the dollar or less, from the current level of around 85. Selling yen and buying dollars would require support from the US Federal Reserve and perhaps other central banks. But the Fed is more concerned with US growth worries.
The current bout of political pressure may produce a little more monetary easing. The central bank may, for example, offer six-month fixed-rate loans to banks, increasing the duration from the current three months. It’s hard to see this as little more than what John Maynard Keynes called pushing on a string. Simultaneous fiscal pull ought to help, but only for a short time.
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Moreover, the economy is not so bad. Second-quarter GDP was up 2 percent on the same period a year ago - better than in the United Kingdom. The annual growth rate of 2.9 percent in the broad M2 money supply is no worse than in other major economies.
Japan’s big lesson is that not all problems can be solved with monetary and fiscal tools. Some economists blame a paternalistic corporate culture or the long legacy of the burst property bubble in the country’s financial system.
Japan is left in a comfortable malaise: it is wealthy, with low unemployment, but dependent on demand elsewhere. It may only be when a more painful crisis is reached that the country will discover and address the profound causes of its low growth. But further unstimulating fiscal stimulus isn’t the solution.